U.S. and Others Release Emergency Reserve Oil But Don't Expect More than a Temporary Price Drop of 15 or 20 Cents a Gallon

U.S. and Others Plan Biggest Release of Reserve Oil

June 23, 2011

AP – The United States and other nations that depend on oil imports will release and sell 60 million barrels of crude from emergency stocks in an effort to ease the strain of high oil prices on the global economy.

The release by the International Energy Agency, a group of more than two dozen countries, covers only what the world uses roughly every 16 hours. But it was enough to send oil prices lower, at least for the moment.

In addition to helping the struggling economies of the U.S. and Europe, analysts said the move was meant as a rebuke to OPEC, which has refused to increase oil production to bring down prices.

It will be the largest sale of crude ever from world strategic reserves and only the third since the IEA was formed in 1974 after the Arab oil embargo. The IEA released oil in 2005 after Hurricane Katrina and in 1990 and 1991 after Iraq invaded Kuwait.

Half the oil will come from reserves in the United States. Refiners who turn crude into gasoline will be able to bid on the extra oil and have it shipped to them from the salt caverns along the Gulf Coast where it is stored.

The IEA said high oil demand and shortfalls of oil production caused by unrest in the Middle East and North Africa threatened to "undermine the fragile global economic recovery."

The uprising in Libya has taken 1.5 million barrels of oil per day off of the market — half a million barrels less than will be released each day by the IEA.

The price of oil rose to nearly $114 per barrel in at the end of April, the highest since the summer of 2008, but since then has fallen considerably. Analysts questioned how much relief the move would provide the economy, and for how long.

One analyst, Andrew Lipow, said the timing of the announcement, a day after Federal Reserve Chairman Ben Bernanke delivered a negative outlook on the economy, suggests that industrialized countries are grasping for solutions. He said Americans should expect the price of gasoline to fall, but not dramatically, in coming weeks.

"Fifteen or 20 cents a gallon of relief is not enough to make people feel good about their job prospects or losses on the stock market or our general economic slowdown," he said.

The IEA and the White House said they were acting to increase the supply of oil available during the peak summer driving season.

"We are taking this action in response to the ongoing loss of crude oil due to supply disruptions in Libya and other countries and their impact on the global economic recovery," Energy Secretary Steven Chu said.

Gas prices have already fallen for 20 days in a row. They were down another penny Wednesday, to a nationwide average of $3.61 per gallon, according to the AAA Daily Fuel Gauge Report. That's about 21 cents lower than a month ago.

The timing of the release brought criticism from business groups and Republican lawmakers, who accused President Barack Obama of playing politics with the country's oil reserves, which are intended to address emergencies.

The amount of oil to be released, 2 million barrels per day, represents 2.2 percent of daily global oil demand. The 60 million barrels to be released over the span of a month is less than one day's demand, about 89 million barrels.

The IEA left open the possibility that it could continue the program after a month.

The IEA's move comes two weeks after OPEC, the Organization of Petroleum Exporting Countries, decided during a tense meeting not to increase oil production to meet rising demand. OPEC is made up primarily of Middle Eastern and North African nations.

OPEC countries are divided over whether to increase supply. Iran and Venezuela want to keep production stable in hopes of keeping prices — and revenue — high. Saudi Arabia wants to increase production, fearing that high oil prices will hurt the global economy and reduce oil demand over the long term.

The head of the IEA, Nobuo Tanaka, expressed disappointment about OPEC's decision after that meeting. At a news conference Thursday in Paris, he said the IEA's action would "contribute to ensuring that adequate supplies are available to the global market."

Kevin Book, an analyst at Clearview Energy Partners, said the move was the first time the IEA has used its reserves as a defensive weapon "to send an unforgettable message to OPEC." The reserves, he said, have always acted as a shield.

"Now we are using it to bludgeon prices globally. This is the first time we've used our shield as a club."

In addition, Book said, it sends a signal to oil investors that governments will go to great lengths to fight high oil prices. These oil investors, including banks, mutual funds and pension funds, buy contracts for oil in hopes the price will go up, but they don't actually use the oil. Critics have said these investors, derided as speculators, have helped push oil prices far higher than they would otherwise be.

"Part of the reason to do this is to make anyone on the other side of oil consumers, whether it is speculators or oil cartels, worried that it will happen again," Book said.

Oil finished trading at $95.41 on Wednesday just before Fed Chairman Ben Bernanke said the economy may be in bigger trouble than previously thought. Prices dropped to about $94 overnight and then fell as low as $89 per barrel after the IEA announcement. Oil finished trading Thursday at $91.02.

Worldwide oil demand is at record levels because the recovering economies of the West and the surging economies of Asia are burning more gasoline, diesel and jet fuel. The unrest in the Middle East this spring cut into supply. Those two factors drove prices higher, raising costs for shippers, travelers and commuters and leaving people less money to spend on clothes, entertainment and travel.

The U.S. economy grew at a rate of 1.8 percent in the first quarter of this year, down from 3.1 percent in the previous quarter, in part as a result of high gasoline prices.

Oil prices fell later in the spring, though, as the U.S. economy appeared to slow and Greece's financial crisis threatened to spread to the rest of Europe. Reports that Saudi Arabia would increase production in defiance of OPEC helped send prices lower in recent days. It's unclear whether Saudi Arabia has begun to do so, or still might.

Also, oil supplies in the U.S. are among their highest levels ever, a result in part of rising North American production and less consumption.

Analysts also said that while the IEA move will lower oil prices in the short term, it also reveals major concerns about the ability of oil producers to meet growing world demand in the future. If they can't, oil prices will rise dramatically.

Bernard Baumohl, chief global economist at the Economic Outlook Group, said oil would have to drop below $80 a barrel to have much economic impact on the economy. He said he doesn't think the 60 million barrels is enough to do that.

"The argument is, if we can lower oil prices that would be a major tax cut," Baumohl said. "The logic is fine. Whether it can successfully be carried out is the question. And I don't think it can."

IEA members are required to hold in reserve the equivalent of what they would import in 90 days, though countries collectively now hold 146 days' supply.

The U.S. stocks, called the Strategic Petroleum Reserve, hold 727 million barrels. The reserve has never been fuller. It held 707 gallons before the U.S. last tapped the reserve in 2008 in response to supply disruptions caused by Hurricanes Gustav and Ike.

The IEA decision will free about 30 million barrels in the United States. Europe will release 18 million barrels and industrialized countries in Asia 12 million.

For U.S. refiners, bidding for the oil now held in reserve will mean having to import less from abroad. The 1 million barrels per day to be released is about 20 percent of what Gulf Coast refiners import.

Oil Dives to 4-month Low as Emergency Stocks Unleashed

Jun 23, 2011

Reuters – Oil tumbled 6 percent on Thursday to a four-month low after the world's top consumers released emergency oil reserves for the third time ever, a surprise intervention to aid the struggling global economy.

The International Energy Agency announced it would inject 60 million barrels of government-held stocks in the global market, immediately increasing world supply by some 2.5 percent for the next month and sending prices spiraling, with U.S. crude prices erasing all of the year's gains.

The move shocked traders who had been expecting the IEA to give top exporter Saudi Arabia more time to make up for the supply shortfall following OPEC's failed meeting on June 8, when other members blocked Gulf efforts to hike output.

"It comes after the Saudis said they would increase output so it suggests they think this might not be enough," said Helen Henton, head of commodity research for Standard Chartered Bank. "I think it will knock prices lower. I expect prices to be lower a month from now."

Goldman Sachs, whose oil price forecasts are closely watched by markets, said the release of the IEA oil could knock prices for Brent crude down by $10 to $12 a barrel.

Brent crude futures for August plunged by more than $8 after the news, before settling at a four-month low of $107.26 a barrel, down $6.95 for the day.

U.S. crude lagged the decline as traders bet the relaxation of European oil reserve requirements would have a more direct and immediate impact on London Brent.

August U.S. crude dropped $4.39 to settle at $91.02 a barrel, taking prices more than 20 percent below their post-2008 high above $114 in early May.

U.S. heating oil futures also slumped nearly 6 percent, down 17.32 cents to settle below the 150-day moving average.

BRENT HIT HARDEST

The deeper drop in Brent pushed the London grade's premium to U.S. oil to just over $16 a barrel, off $3 from Wednesday in late trade. As part of the action, the United States will release 30 million barrels of crude from its Strategic Petroleum Reserve, specifically light sweet oil.

Brent trade volumes surged to a record high, hitting 1.15 million lots trading in late activity, nearly 2-1/2 times the 30-day average. U.S. volume topped 920,000 lots traded, 30 percent over the 30-day average.

The Brent futures curve flattened on the news, with the premium of the August contract to the September contract to 9 cents, down from 45 cents on Wednesday and reflecting an increase in prompt supplies.

Oil markets were already down sharply ahead of news of the release, due to worries over global fuel demand following higher-than-expected U.S. jobless claims, forecasts of lower U.S. growth from the Federal Reserve and evidence of a slowdown in Chinese manufacturing. The economic concerns helped push investors out of gold, down 2 percent on the day, while other commodities showed smaller losses.

The sell-off also followed a move by the U.S. Federal Reserve on Wednesday to cut its growth forecasts for the world's biggest economy.

IEA EYES ECONOMIES

"This supply disruption has been underway for some time and its effect has become more pronounced as it has continued," said the IEA.

It said expectations were that Libyan production would remain off the market for the rest of 2011.

"Greater tightness in the oil market threatens to undermine the fragile global economic recovery," it said.

The IEA release, at 2 million barrels per day (bpd) over the next 30 days, is more than the daily loss of Libya's 1.2 million bpd exports and comes despite a broad view that the world is not now short of crude -- although many analysts and agencies also agree that markets will tighten later this year.

The release includes 30 million barrels of light, sweet crude from the U.S. Strategic Petroleum Reserve -- the same quality that markets have lost due to the Libya disruption.

Against that backdrop, analysts said the use of the reserves now -- unlike the previous two releases, which immediately followed the first Gulf War and Hurricane Katrina -- signaled it may have been more concerned with tempering prices to aid a faltering economic recovery.

"The move is significant, as it represents a reach by member countries for the remedy of last resort to high oil prices," said John Kilduff, a partner at Again Capital LLC. "Clearly, the energy price spike is being cited as the reason for the economic slowdown and this is a reaction to that. The Libyan outage provides good cover."